Blog Post

European carriers are moving away from handset subsidies, analysts find

One by one, the signs point to the decline and perhaps demise of the mobile handset subsidy. Whether it’s Vodafone paying newfound attention to the high-end pay-as-you-go market or regulators threatening to let contract customers walk out in the event of a price hike, there are frequent signs that carriers won’t be subsidizing the smartphones they sell you forever.

What’s taking the place of those subsidies? Leasing and financing plans, such as Vodafone’s Red Hot and O2 Germany’s My Handy schemes. According to Informa analyst Francesco Radicati, this makes it easier for operators to cope with the growing popularity of expensive smartphones:

“The rising cost of devices like the iPhone means operators have to pay increasingly large subsidies to offer ‘free’ phones. Financing allows operators to continue offering phones for a low up-front price without subsidizing them; as an added bonus, it makes it easier to market smartphones to consumers on pay-as-you-go.”

Why does this matter? Partly because it spells the end for lengthy contract lock-in periods — something operators have to consider anyway due to new consumer protection laws in countries such as Denmark — but also because it means a major shift in consumers’ perception of smartphone costs.

Absorbing handset costs into the associated monthly contract payments creates the illusion of the handsets being cheap or even free. This illusion has been handy in some ways — perhaps the smartphone revolution would not have been possible at scale without it — but ultimately it distorts the market.

Expensive toys don’t really come for free, and pretending that they do doesn’t help anyone. Two-year contract terms should not be the norm. Monthly payments should reflect only the service that the consumer gets in return; nothing more. On top of that, the need to absorb more and more upfront handset costs certainly doesn’t do much for carriers’ ability to invest in their networks. If subsidies really are on their way out, then good riddance to them.

A question – how is offering financing plans different for operators from offering subsidies? I mean, they still need to buy the phone in advance from the manufacturer and they still get their investment back over time? Or I am getting it wrong?

“Absorbing handset costs into the associated monthly contract payments creates the illusion of the handsets being cheap or even free. This illusion has been handy in some ways â€” perhaps the smartphone revolution would not have been possible at scale without it â€” but ultimately it distorts the market.”

I’m afraid that isn’t quite true.

China and India don’t have much in the way of cell phone subsidies and they’ve shown massive growth in smartphone penetration.

But only relatively recently. In the “west”, subsidies encouraged smartphone takeup when such devices were newer, helping create the scale that eventually made it possible to introduce smartphone functionality at the low end of the market. That’s why people in China and India are now able to buy sub-$100 smartphones.

err, not sure about that last paragraph, it reads a bit like the world according to David Meyer. Interesting that you fail to mention the big experiment in ending subsidies in Spain that ended up with two of the proponents reversing their decision, Vodafone & Telefonica as they lost significant share of gross adds to Orange

Vodafone, which followed Telefonica in the first place, did reverse its decision. That said, Spain isn’t generally a great example for testing consumer behavior right now, given its economic situation.

But will the cost go down in proportion to this? If I bring my own phone to my carrier, there is no special deal or discount price because they aren’t subsidizing the phone. The only difference to me is that I can change my bundle at will.

Even staying on top of their cheaper packages at a reasonable rate, say, twice a year, I can only see saving about $200 – $300 over the same 3-year time span as a contract would have been, but I need to spend $650+ for a phone.

If that stays true, then the end of subsidies doesn’t mean savings to me, it means more profit for them.